Positives warrant attention

Despite the weak volume of recent gains, our market indicators have turned increasingly bullish. Be aware that our trend-following methodology simply follows the confirming signals, and tries to identify potential trend-changing alerts (particularly in our sentiment and behavioral finance studies) in order to assess the risk/reward of establishing trend-contrary hedges.

This week, we saw improvement in VIX (flashing a less extreme that would typically foreshadow a trend change to the downside), and a positive ending of the put/call ratio (its close on Friday at 1.28 is a bullish contrary signal, see chart below). When accurate (we find this indiicator accurate about 70% of the time), Put/Call extremes tend to lead equities by 1-2 weeks (potentially foreshadowing further equity gains later this month).

As for sector analysis, Nasdaq has maintained its relative underperformance vs. SPX (a negative), financials have performed "OK," and discretionaries have outpaced staples, a positive sign.

On the intermarket front, rates have edged up slightly (a bullish sign as economic indicators edge upward) and the interest rate spread between corporate debt and Treasuries has narrowed, another positive.

Finally, in the "style" category, small caps maintain a lead vs. large caps, a bullish sign, along with growth stocks taking the lead versus value. See charts below.

So what does this all mean? A growing swell of positive signals (the majority of our charts in our Market Tour on Stockcharts.com are green, or positive), suggests "staying the course" on the long side, with potential resistance marked at the SPX 200-day moving average (1116) and the August high (1128). Potential seasonal weakness in late September and October) looms, however, markets have a tendency to surprise and change character when you least expect it!

Safe trading!


Bob Palmerton

Click here for the updated Market Tour on StockCharts.com.